Green Leases

With both landlords and tenants increasingly focused on how energy consumption affects the occupancy cost of a building, Green Lease language can offer benefits to both sides of the negotiation; and when money can be made or saved we usually see the activity increase.  In fact, Washington and California have already passed laws that require disclosure of previous energy consumption before a lease is executed.

The term “Green Lease”, or Energy Aligned Lease, effectively aligns the financial interests of building owners and tenants so that they can work together to save money, conserve resources, and guaranty the efficient operation of buildings. The goal is to promote energy efficiency by creating lease structures which equitably align the costs and benefits of efficiency investments between building owners and tenants.

Most building leases lay out how energy costs are divided between tenants and owners.  Often, these leases are not structured in a way that promotes energy savings. Under most leases, owners are responsible for the upfront capital costs of energy efficiency upgrades (capital expense), but tenants are the sole beneficiaries of reduced energy bills (operating expense). Conversely, when owners are responsible for energy costs through a PSF (per square foot) charge to tenants, there exists little incentive to save energy on behalf of the tenants. This condition creates what is known as a ‘split incentive’ between owners and tenants where both parties have little incentive to invest in energy efficiency.

The solution lies in energy aligned language or an energy aligned clause (EAC) inserted into standard leases that incentivizes each party by providing mutually beneficial economic incentives. Building owners can start to immediately recoup capital investment from the tenant over a slightly extended payback period while the tenant saves on operating expense over the same period while continuing to receive additional savings over the life of the energy efficient products. In most cases, the use of this pass-through structure will make energy retrofits net present value (NPV) positive to both owners and tenants, which provides a green light for energy saving retrofits. In addition, energy aligned leases that reduce energy costs for occupants make those buildings more attractive to potential tenants, helping increase occupancy and asset values for owners.

At EnviroProfit, we can help you adapt ‘Green Lease’ provisions into any existing or new leasing contracts. Whether you are a building owner or tenant, we will help you create sustainable savings while reducing your carbon footprint with measurable results.

‘Green Lease’ / Energy Aligned Clause (EAC) reference: